Strategies for Extending Your Reverse Mortgage Duration
A reverse mortgage could be a handy financing option for senior homeowners, transforming home equity into cash. However, it's essential to repay the loan after the homeowner's demise or move from the property. But this cash flow could run dry if the homeowner outlives the mortgage. Here's how to dodge that predicament.
Key Insights
- The amount of reverse mortgage funds you receive hinges on your home equity and age.
- Six distinct ways to receive reverse mortgage funds exist, each with its pros and cons.
- Consider the potential implications on a spouse who might outlive the reverse mortgage proceeds.
Various Types of Reverse Mortgages
Exploring diverse reverse mortgage options can help you pick a plan suitable for your finances and living arrangements.
- Single lump sum: Receives a one-time, upfront payment, based on home equity. This option offers a fixed interest rate. However, it could be risky, with borrowers facing foreclosure due to sudden wealth or high expenses.
- Line of credit: It's an irrevocable credit line, guaranteeing access to funds despite housing market fluctuations, credit score drops, or home devaluation. Only borrowed amounts are charged interest, and mortgage insurance fees.
- Term payment plan: Monthly equal payments for a set period. Once the term ends, the reverse mortgage is "maxed out," representing the max borrowing limit based on age, interest rates, and home value.
- Modified term payment plan: Combines monthly payments and a line of credit, providing predictable income and borrowing flexibility.
- Tenure payment plan: Equal monthly payments for life, as long as at least one borrower inhabits the home. The arrangement involves an adjustable interest rate, making it complicated to predict the final repayment amount.
- Modified tenure payment plan: A plan with a small line of credit, providing flexibility to access additional funds as necessary. However, monthly payments are smaller compared to a standard tenure plan, as some equity is allocated to the line of credit.
Note
If home values significantly increase after the initial reverse mortgage application, consider refinancing for better access to funds. Increased maximum principal limits over the years may offer more value from your equity.
Averting Depletion of Reverse Mortgage Funds
Taking a reverse mortgage earlier in retirement can lower the chances of outliving funds. Alternatively, opting for a reverse mortgage line of credit early and letting it accumulate over time can serve as a safeguard.
Transitioning Your Current Plan
If you've already acquired a reverse mortgage and fear outliving the funds, you may modify your plan, depending on the lender and current plan. Switching from the fixed-rate, lump-sum option is often infeasible. However, you can change other plans to better suit your requirements, provided you stay within your reverse mortgage's principal limit.
Changing the payment plan is usually less complicated and costlier compared to refinancing. It typically includes minor administrative fees.
The Non-Borrowing Spouse Dilemma
A younger, non-borrowing spouse could face difficulty if they outlive the borrower. Upon the borrower's death, they're ineligible for reverse mortgage payments.
- Home Sale: The non-borrowing spouse may be forced to sell the home, leaving them without assets or income.
- Refinancing: If the surviving spouse qualifies for a traditional mortgage, they might refinance the reverse mortgage.
- Home Retention: If the reverse mortgage balance exceeds the home value (being "underwater"), selling the home or letting the lender foreclose could cause homelessness and financial loss. In such cases, keeping the home is usually best for the surviving spouse.
The Takeaway
Although reverse mortgages can boost retirement finances, careful planning is crucial, particularly when a younger non-borrowing spouse is involved. Learning about various reverse mortgage types and seeking financial advice can help tailor a solution to your unique situation.
Caveat: Reverse mortgage modifications can significantly influence the financial status of surviving non-borrowing spouses. Prior to 2014, non-borrowing spouses faced issues maintaining their home after the borrower's death, as they weren't protected from foreclosure unless they were borrowers on the loan. Changes made after 2014 under Home Equity Conversion Mortgage (HECM) rules offered some protection for non-borrowing spouses.
- The amount of reverse mortgage funds one receives depends on their home equity, age, and the type of reverse mortgage chosen.
- Six options for reverse mortgages exist, each with its benefits and potential risks, such as the single lump sum, line of credit, term payment plan, modified term payment plan, tenure payment plan, and modified tenure payment plan.
- Receiving a reverse mortgage earlier in retirement can potentially lessen the risk of outliving the funds, and allowing a line of credit to accumulate over time can serve as a buffer.
- Modifying an existing reverse mortgage plan, depending on the lender and current plan, is possible, but changing from a fixed-rate, lump-sum option might be impractical.
- If a younger, non-borrowing spouse outlives the borrower, challenges may arise. Possible solutions include selling the home, refinancing, or retaining the home if the reverse mortgage balance is less than the home value.
- To ensure stability and avoid financial problems for the surviving non-borrowing spouse, it's essential to plan carefully, understand various reverse mortgage types, and seek financial advice tailored to one's unique situation.
